Almost three years after Ireland bowed to the pressure of unsustainably high bond yields and sought a €64 billion rescue package from international lenders, Ireland returned to the European political limelight this week.
Firstly, Ireland’s campaign for further debt relief for its investment in the banks through the ESM fund emerged as a sticking point during German coalition negotiations, with the centre-left Social Democrats arguing that any decision should take into account Ireland’s corporate tax rate and resistance to the financial transactions tax (FTT), which it argues should be used to fund future bank bailouts.
A few days later, Taoiseach Enda Kenny's declaration at the Fine Gael party conference that Ireland would exit its programme on December 15th made international headlines. As a result – and partly because of lack of progress on other matters such as banking union – Ireland's exit from the bailout became the main talking point at this week's meeting of EU finance ministers.
Balance sheet assessments Negotiations between Dublin and its international lenders on a bailout exit strategy will intensify over the next few weeks. Minister for Finance Michael Noonan is expected to meet euro zone officials before the end of the month, before travelling to Washington for discussions with the IMF. This will coincide with the final visit to Dublin by the troika at the end of this month, and the Central Bank's submission of its balance sheet assessments of Irish banks to Europe for scrutiny. This makes a final decision on an exit strategy likely by the next euro group on November 11th.
Euro zone authorities were keen to stress this week that it is up to Ireland to request a precautionary credit line, but in reality the decision will be made in close discussion with European partners. Ireland will still be repaying billions of euro of bailout money after the programme ends. Nonetheless Ireland is entering this critical phase in its relationship with Europe from a strong negotiating position. As euro group chairman Jeroen Dijsselbloem said on Monday, a successful exit is as important for the euro zone as it is for Ireland. "We have a joint interest in making the access to market as successful and sustainable as possible," he said. The end of the Irish programme represents a key milestone in the euro zone crisis. While Spain is also expected to exit its programme a month later, its rescue package was a partial bailout which saw the country draw down €40 billion from the ESM fund for its banks. Ireland's graduation from a full bailout bailout programme will be the key test of the euro zone's response to the crisis. Already, the European Commission has claimed that Ireland's successful exit from the bailout is proof that the rescue programme has worked. Pointing out that both Ireland and Spain were on track to successfully exiting their programmes, EU commissioner Olli Rehn said on Monday night that "the conditional financial support has helped to deliver an economic turnaround in the two countries concerned".
Keenly aware that all eyes will be on Ireland’s return to market funding, euro zone authorities may be unwilling to take the chance that Ireland, which has still one of the highest deficits in Europe, should exit the programme unaided.
Market jitters
The fear that markets may react negatively to Ireland going it alone without a back-up programme and thus spark jitters across the euro zone, may encourage euro zone authorities to press Ireland to request a precautionary credit line. Thus recent indications by the Government that it may not need a precautionary credit line could be seen as a clever negotiating tactic – if pressed to take precautionary support, Ireland can say it will do so, but only if the conditions are not too onerous.
Ireland’s entitlement to further debt relief through the ESM also resurfaced this week, when German finance minister Wolfgang Schäuble reiterated Germany’s staunch opposition to using the fund to directly recapitalise banks retrospectively. Comments from the SPD that Ireland’s corporate tax is too high also suggested that Ireland is on the back foot when it comes to arguing for further debt forgiveness. Yesterday, Michael Noonan said the Government was still confident of securing further debt relief so that Irish debt levels “can move down towards the European average”. This represents a subtle but significant shift in reasoning as Ireland continues to press for further debt relief, although a decision on ESM direct recapitalisation is at least a year away. In the meantime, Dublin will be focusing its efforts on securing the best deal for the country as it embarks on one of the most crucial set of negotiations yet with its European partners.